2020 has upended too many of our day-to-day routines. But the pace of mergers and acquisitions, while slowed, has not stopped. And so we see that everyone's favorite company-working-to-commoditize-your-business, Intuit, is buying the personal finance website Credit Karma for $7.1 billion. Credit Karma is best known for providing consumers with free credit scores and other financial services — but makes real money recommending credit cards and loans.
One problem with the merger: Credit Karma also offers free tax-prep service. This could raise eyebrows with antitrust enforcers at the Justice Department fearing the merger might leave consumers with fewer, pricier e-filing options. Intuit's TurboTax unit has already received criticism for steering consumers away from free-filing options and upselling them unnecessarily expensive services. Hard to believe Intuit would do that, right?
So now Credit Karma is in talks to sell that part of their business to Square, Twitter founder Jack Dorsey's fintech company that lets consumers transfer cash and buy and sell Bitcoin using their smartphones.
What does this imply for you? Two things that are not promising, and one that is:
First, tax prep is becoming ever-more-commoditized. Every time a new app or website offers to do the work for free, a CPA loses his wings. The problem isn't that DIY online filing threatens your core clientele. The problem is that free online filing chips away at the value the rest of your clients perceive in your service. And make no mistake here, online filing is eroding your universe of prospects and clients. The IRS reports that 72 million Americans prepared and e-filed their own returns in 2020 — a 25% increase over 2019.
Second, tax prep margins are shrinking. It's going to be harder and harder to ask and maintain premium fees, especially for 1040 clients, when companies are competing with "free." (It's actually easier to compete with "free" than you think, but it requires a little effort that clients may not always follow.) And who wants to be in a business with pricing pressure and shrinking margins?
Finally, data can be more important than actual revenue if the data leads to greater revenue. Credit Karma doesn't have to charge for tax prep because what they really want is information to target borrowers for credit cards and loans. The referral fees they earn on that business is worth far more than what they would earn charging for commodity tax returns. So why put the barrier of a tax-prep fee between themselves and their customer?
This actually works for you as well. If you're in the financial services business, preparing tax returns can open the door to far more income managing client assets than you could ever earn by filing their taxes. Lots of $300, 400, or $500/year clients with simple 1040s have hundreds of thousands or even millions of dollars to be managed. The ongoing fees from those assets dwarf the tax-prep revenue — and the equity in an asset management business dwarfs the equity in the same amount of tax-prep revenue. (You've probably seen the model, and some of you reading these words are offering the model: cheap tax prep service to attract clients with taxable interest income to turn into annuities or insurance.)
So, lesson #3,247 in "don't take your business for granted." If I sound like a broken record with the "robots are coming for your business" threat, it's because I am. (Is everyone here old enough to understand the "broken record" metaphor?) If I sound like an evangelist for the "add financial services" message, it's because I am. Think about it over the weekend and see what you can do Monday morning to protect yourself!
Member Notes: We've begun dropping Implementation Guides into the Technical Training Center modules to make that training more immediately helpful. You'll find all the paperwork you need to implement the Augusta Rule, Gift-leaseback, Hire Your Kids, and Medical Expense Reimbursement Plan modules immediately, with more on their way.
Holiday Hours: The office will be closed Wednesday, Thursday, and Friday next week for the holiday. Stay home, enjoy the football and turkey with our family or "Covid bubble," and we'll be back on Monday the 30th!